Who pays tax on disability benefits?

Dear Tax Talk,

I am listed as "payee" for my two sons, ages 14 and 16, for Social Security disability benefits due them from their father's disability benefits. The 16-year-old started his taxpaying career in 2009 by taking a part-time job. What does he claim of his benefits of approximately $375 a month plus his earned income of approximately $3,000? How? Does he even need to file? Any helpful publications would be appreciated. Should I be including their Social Security disability benefits as part of my income?

Dear Rhonda,

It's confusing when you have to file a tax return, but just figuring out whether you have to file is also confusing. First off, the Social Security disability benefits that your children receive in your name is their income and only would be reportable as income by them if they had sufficient income that caused it to be taxable.

Social Security disability benefits are never taxed to you as custodian. Filing requirements are based on gross income exceeding certain thresholds and also filing status, age, blindness and dependency status. Sometimes you may have too little income but still be required to file a return if you owe other taxes such as self-employment tax on a 1099-MISC you received as an independent contractor.

You will still probably claim your son as a dependent, as you provide more than one-half of his support. As a dependent your son has reduced thresholds of gross income in determining his filing requirements.

Table 1 of Publication 501 at page 3 provides the general gross income levels at which most taxpayers who are not a dependent of another would be required to file a return. Note that if you were born before Jan. 2, 1945, you're considered to be

65 in 2009.

Table 2 provides the rules that apply to dependents. Table 2 discusses earned and unearned income as a distinction in filing levels. A dependent with low unearned income is required to file at lower levels of income than one with earned income only.

In this table, unearned income includes taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable Social Security benefits, pensions, annuities, and distributions of unearned income from a trust.

Social Security benefits are only taxable if one-half of your Social Security benefits plus all your son's other income exceeds $25,000. Since your son is well below this threshold, the Social Security benefits are not taxable and would not be considered unearned income for purposes of the table.

If you're not too baffled, you can see that your son is allowed to earn up to $5,700 -- the standard deduction amount -- before he is required to file a return. If however, he had federal income tax withheld, he may want to file a return to get a refund. Also, don't forget to check your state filing requirements.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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